Utilities Tap Cheaper Compliance Option With UN Carbon Banking

Utilities and refineries have
retained the most flexibility among European Union industries to
use lower-cost United Nations carbon offsets to comply with the
bloc’s emissions caps from 2013 to 2020, according to EU data.

The industry groups used the smallest share of their quota
of UN credits in the five years through 2012, Bloomberg New
Energy Finance analysis of the EU data show. Unused offsets can
be applied to EU targets over the next seven years, the market’s
third phase, when utilities no longer get free EU permits.

Companies holding EU allowances for December can earn 2.98
euros a ton today by selling the permits and buying cheaper UN
Certified Emission Reductions, or CERS. Emitters that don’t swap
and instead “bank” a larger UN offset quota into Phase 3 give
themselves the option to meet their future emission obligations
at a lower cost.

“Utilities will have the biggest short position in Phase 3
as they now receive no free allocation, so for them the option
to use CERs in Phase 3 would have looked pretty valuable,”
Trevor Sikorski, an analyst at Energy Aspects Ltd. in London,
said by phone. “The option is more valuable to you if you have
the luxury of being able to think long-term.”

Under the EU’s eight-year-old cap-and-trade system,
tradable permits are allocated to polluters that must surrender
enough of them to cover their emissions or pay a fine. Utilities
in most EU nations have to buy all of their permits and offsets
from this year through 2020, while industrial installations will
continue to get most of their allowances for free.

Unused Quota

EU rules allowed factories and power stations to match a
portion of their emissions from 2008 through 2012 with UN CERs.
On top of any unused quota from the second phase, an additional
share may be given in Phase 3 by the European Commission, the
bloc’s regulator.

Power stations used a total of 556 million UN CERs and
Emission Reduction Units, or ERUs, to meet caps on their
discharges from 2008 through 2012, according to EU data released
last week. That means they will be able to bank a total of 221
million tons, or 28 percent of their Phase 2 limit.

Heat and local power installations will bank 47 million
tons, the second-biggest unused surplus, after using 74 percent
of their quota through 2012, the data show. Refiners used 68
percent, the lowest share of any Phase 2 quota.

Industrial companies such as lime, glass, steel and cement
manufacturers surrendered between 86 percent and 95 percent of
their Phase 2 quota.

Installations suffering from Europe’s recession generated
funds by swapping more EU allowances for CERs, according to
Energy Aspect’s Sikorski.

The price spread between EU permits and CERs widened last
year from from 2.53 euros a ton on Jan. 4, 2012, to as much as
8.08 euros on Nov. 12, according to ICE Futures Europe.

“For industrials, if things were tight on the credit side,
then the value of the option to use offsets in the future was
less than the option to generate cash at the time,” Sikorski
said. “Generating cash through the spread helped keep business
afloat.”

To contact the reporter on this story:
Alessandro Vitelli in London at
avitelli1@bloomberg.net

To contact the editor responsible for this story:
Lars Paulsson at
lpaulsson@bloomberg.net